Keeping more of what you earn is the goal.
When you sell an investment property, your profit is subject to capital gains tax. There is a way to defer this tax under the IRS tax code. Here you’ll find a brief outline of the 1031 exchange process and key guidelines.
Internal Revenue Code Section 1031 allows investors to defer capital gains tax when selling an investment property. REALTOR® Erick Salgado can help you navigate the 1031 Exchange with the help of a Qualified Intermediary.
The guidelines and rules are very simple. Strict adherence is required for a successful exchange.
Property Identification
The IRS states that the properties involved in a 1031 Exchange must be for investment or business purposes and be “like-kind.”
Timeline
The timelines for a 1031 exchange are crucial. From beginning to end, a 1031 Exchange must be completed in 180 days.
The beginning of your 1031 exchange timeline is at the Close of Escrow of the relinquished property.
The end of your 1031 exchange timeline is day 180 at midnight. By this day, the replacement property must acquired.
Additionally, the IRS requires that all potential replacement properties be identified in 45 days from the close of escrow of your relinquished property.
All timelines are strict.
Identification: 2 rules
Identification of all potential replacement properties must be done in writing by day 45. There are two ways to identify property under a 1031 exchange.
3 Property Rule
Allows you to identify any three properties in the United States irrespective of value.
200% Rule
Allow you to identify any number of properties in the United States so long as the total value of the identified properties does not exceed 200% of the relinquished property value.
Tax Deferral
In order to ensure that 100% of your capital gains tax is deferred, two requirements must be met:
- All cash generated from the sale of the relinquished property must be reinvested into one or more of the identified properties.
- The replacement properties must be equal or greater in value to the relinquished property.
For more information about a 1031 exchange, contact REALTOR® Erick Salgado.